In one of the most famous scenes of the movie Wall Street antagonist Gordon Gekko explains to neophyte trader Bud Fox why he decided he was going to liquidate the fictional Bluestar Airline: “Because it’s wreckable.”
He did not mean it’s wreckable in the sense that something should be destroyed because it can be destroyed, but rather that that the company was worth more to the world in pieces than as a whole. And actually, with large companies, this is very often the case.
The kernel of truth in the unrepentant capitalist Gekko’s statement is that often, monolithic companies have become lumbering giants, inefficient behemoths that lack focus and waste billions supporting an overweight structure.
Sound like Microsoft (MSFT) ? And the truth is if Microsoft were ever to be broken up, billions in potential value could be unlocked.
Kill the Beast! Kill the Beast!
Microsoft is one of the most unwieldy companies on the planet. It is a burgeoning mass made up of a famously uncooperative mass of disparate departments, united in name only.
There’s their software division. There’s their video game division and the reasonably successful Xbox series. There’s the unmitigated stinking disaster that is Bing. Not to mention tablets and the expected foray into smartphones following the Nokia acquisition.
That’s a lot of different directions to go in. And it comes at a time when the company is about to lose its bald head, the much derided Steve Ballmer.
The question for stockholders is what the most profitable decision is: trying to find someone who can maneuver the company over all that ground, or end the once undisputed king of tech into smaller, less dominant, but theoretically more nimble compenents?
Not “One Micorsoft,” But Two, or Three…
Several months ago Ballmer announced the “One Microsoft” initiative, aimed at directing the company in a coherent direction. At the same time, pundits were already imagining what it would look like to take the ax to Microsoft and split it like a cord of wood.
Analysts imagined at first a clean split of the company: one consumer tech (Windows, Office, Xbox) and one business-centric (SharePoint, Azure, Dynamics). But since fall 2013, analyst opinion has begun to include the ideas of splitting Microsoft into even smaller, more specialized parts.
Jim Cramer suggested splitting Microsoft into three businesses: a software business; and “entertainment” business to handle the likes of Xbox; and a cellphone business – essentially, Nokia with more capital. Presumably, this would mean ending the multi-billion dollar failure of Bing, a proposition some of Ballmer’s possible successors have floated.
The value unlocked in this kind of breakup would be massive. Killing Bing alone would put an end to billions in lost income. And refocusing software could help reasserts Microsoft’s position in operating systems, a market currently dominated by Apple Inc. (AAPL) .
But it’s not just pundits calling for Microsoft’s head. It’s also one of the founders.
On Nov. 4 Microsoft co-founder Paul Allen’s money manager, reportedly speaking for Mr. Allen, called search and Xbox a “distraction” and recommended spinning them off.
How Much Could be Unlocked?
That’s the million dollar question. Or, more likely, multi-billion dollar question.
Rick Sherlund, an analyst at Nomura Securities, suggested if Microsoft spun off Bing and Xbox, they could increase their dividend to a whopping 6 percent, making it the highest-yielding large cap tech company for stockholders.
Others have argued that an “online services” division, comprised of Bing, MSN, and adCenter costs the company $8.1 billion a year in losses. Spinning off those companies alone would allow a massive buyback, dividend increase, or possibly both. The exact value derived from a breakup is uncertain, but there's little reason to believe it wouldn't total in the billions.
Is There a Reason to Keep Microsoft Whole?
Breaking up is hard to do, and in the case of multibillion dollar behemoths, is almost irreversible. Once the decision is made to split, the company can’t really go back on it. Once Xbox or Bing is sold off to another company, you can’t exactly ask for it back. So is there value in keeping it together?
To be sure, Microsoft’s stock this year has not been an outright disappointment. A 37.98 percent return on the year has it outpacing the gains of the otherwise robust S&P 500. And only the largest of companies can do things like institute $40 billion dollar buybacks.
Breaking up also might be easier said than done. Preston Gralla of ComputerWorld argues that Bing, however costly, is too integral to their other products to ever be killed.
But just because Microsoft has increased in value, and just because the poisonous Bing has wormed its way into several other lines, does not means more value won't be extracted long term form extrication. revenue does not mean more could not be unlocked via breakup.
And it’s almost impossible to argue that Microsoft’s incredibly disparate departments work better together. The corproate culture there is notoriously toxic, and there has been little indication "One Microsoft" has rectified this.
Microsoft should pick their next successor soon. The best thing he or she could do is take Microsoft and take the hammer to it.